IMF AC­KNOWL­EDGES IS­LAMIC BANK­ING’S PRO­LIFIC GROWTH

It is now of­fered in more than 60 coun­tries on all con­ti­nents, and has be­come im­por­tant in 14 ju­ris­dic­tions

New Straits Times - - Opinion -

THE In­ter­na­tional Mon­e­tary Fund (IMF), es­pe­cially un­der its cur­rent man­ag­ing di­rec­tor, Chris­tine La­garde, has been a proac­tive sup­porter of Is­lamic bank­ing, and, to­gether with the World Bank, has de­clared it a pri­or­ity for its op­er­a­tions in coun­tries with Is­lamic bank­ing.

In a re­cent re­port ti­tled “En­sur­ing Fi­nan­cial Sta­bil­ity in Coun­tries with Is­lamic Bank­ing”, IMF econ­o­mists have thrown down the gaunt­let to its board with a plan of ac­tion that, if ap­proved, would have game-chang­ing im­pli­ca­tions for the reg­u­la­tion and de­vel­op­ment of the in­dus­try, thus fur­ther pro­mot­ing its sta­bil­ity and sound­ness.

The re­port ac­knowl­edges the sig­nif­i­cant progress achieved in de­vel­op­ing pru­den­tial stan­dards for Is­lamic bank­ing, but con­cludes that the cur­rent frame­work gov­ern­ing the global in­dus­try “con­tains many gaps that need to be closed through the de­vel­op­ment of a more com­pre­hen­sive en­abling en­vi­ron­ment that en­sures the fi­nan­cial sta­bil­ity and sound de­vel­op­ment” of the in­dus­try.

Pru­den­tial stan­dards for con­ven­tional banks gen­er­ally ap­ply to Is­lamic banks, but gaps ex­ist, re­flect­ing the spe­cific fea­tures of Is­lamic bank­ing and their as­so­ci­ated risks. Pru­den­tial stan­dards for Is­lamic bank­ing have been de­vel­oped to com­ple­ment in­ter­na­tional stan­dards, in­clud­ing, in­ter alia, on cap­i­tal ad­e­quacy, “Core Prin­ci­ples of Is­lamic Fi­nance Reg­u­la­tion for Bank­ing (CPIFR)” and the su­per­vi­sory process.

Par­tic­u­lar at­ten­tion needs to be paid to de­vel­op­ing res­o­lu­tion, fi­nan­cial safety nets, such as de­posit pro­tec­tion in­surance and a lender of last re­sort, and (short­term) liq­uid­ity man­age­ment frame­works for Is­lamic banks. Sim­i­larly, the emer­gence of com­plex hy­brid Is­lamic fi­nan­cial in­sti­tu­tions and prod­ucts, ac­cord­ing to IMF, is a reg­u­la­tory chal­lenge, with po­ten­tial im­pli­ca­tions for fi­nan­cial sta­bil­ity.

The in­dus­try has seen pro­lific growth over the last three decades in size, com­plex­ity of prod­ucts and ser­vices, and in de­mo­graphic reach. In­no­va­tion usu­ally drives fi­nan­cial reg­u­la­tion. But, this sheer growth has posed a chal­lenge to reg­u­la­tors, es­pe­cially in emerg­ing mar­kets, given their lim­ited re­sources, lack of tech­ni­cal ex­per­tise and knowl­edge of Is­lamic bank­ing prin­ci­ples, qual­i­fied per­son­nel, and for so­cio-po­lit­i­cal rea­sons where the phe­nom­e­non is not a fi­nan­cial pol­icy pri­or­ity, but was in­tro­duced for fi­nan­cial in­clu­sion rea­sons.

The out­stand­ing ex­cep­tion is Malaysia, which the IMF, World Bank and the Basel Com­mit­tee for

TUES­DAY, MARCH 21, 2017 Bank­ing Su­per­vi­sion con­cur, has the most ad­vanced and com­pre­hen­sive le­gal, reg­u­la­tory, su­per­vi­sory and syariah gov­er­nance frame­works in place in the world, sup­ported by a proac­tive gov­ern­ment pub­lic pol­icy sup­port­ing the de­vel­op­ment of Is­lamic bank­ing side-by-side a con­ven­tional one to give Malaysian con­sumers a choice not only on prod­uct pref­er­ences, but also on their faith tra­di­tions.

In the con­text of the global fi­nan­cial sys­tem, Is­lamic bank­ing’s es­ti­mated size of US$2.6 tril­lion (RM11.5 tril­lion) of as­sets un­der man­age­ment ac­counts for a mere 1.9 per cent of to­tal mar­ket share of global bank­ing as­sets, which is minis­cule by in­ter­na­tional stan­dards, but which points to a huge po­ten­tial for ex­pan­sion, es­pe­cially as the world is in search of al­ter­na­tive fi­nan­cial in­ter­me­di­a­tion so­lu­tions to the cap­i­tal­ist sys­tem in the af­ter­math of the per­ni­cious global fi­nan­cial cri­sis of 2008, the ef­fects of which are still im­pact­ing the global econ­omy and fi­nan­cial sys­tem.

Is­lamic bank­ing is now of­fered in more than 60 coun­tries on all con­ti­nents, and, ac­cord­ing to IMF, has be­come sys­tem­i­cally im­por­tant in 14 ju­ris­dic­tions. This means it ac­counts for 15 per cent or more of the mar­ket share of the to­tal bank­ing sec­tor. In some coun­tries, this fig­ure is 40 per cent, while in oth­ers, such as Malaysia, it is about 26 per cent. Pu­tra­jaya has the am­bi­tion of reach­ing a mar­ket size tar­get of 30 per cent by 2020. The num­ber of ju­ris­dic­tions in which Is­lamic bank­ing is be­com­ing sys­tem­i­cally im­por­tant is set to in­crease to 20 in the im­me­di­ate fu­ture as Or­gan­i­sa­tion of Is­lamic Co­op­er­a­tion (OIC) coun­tries seek new ways to raise funds for de­vel­op­ment and in­fra­struc­ture spend­ing.

The reg­u­la­tory, pru­den­tial and su­per­vi­sory regimes for Is­lamic bank­ing in most OIC coun­tries are a “work in progress”. The speci­fici­ties of Is­lamic bank­ing, es­pe­cially the na­ture of de­posits and

The In­ter­na­tional Mon­e­tary Fund, un­der man­ag­ing di­rec­tor Chris­tine La­garde, is a proac­tive sup­porter of Is­lamic bank­ing. IMF econ­o­mists have a plan of ac­tion that, if ap­proved, would have game-chang­ing im­pli­ca­tions for the reg­u­la­tion and de­vel­op­ment of the in­dus­try, thus fur­ther pro­mot­ing its sta­bil­ity.

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